A Finger on the Pulse of the Financial System

What if it were possible to accurately predict and maybe even prevent the next global financial crisis? Harvard’s Behavioral Finance and Financial Stability (BFFS) Project, conceived at HBS and launched in July 2016, aims to do just that.

An interdisciplinary initiative involving more than 20 scholars from HBS, Harvard Kennedy School, Harvard Law School, and the Department of Economics, the BFFS Project is led by Robin Greenwood, the George Gund Professor of Finance and Banking at HBS. “There has long been a significant collaboration on finance research throughout the University on a one-off basis,” says Greenwood, who worked with fellow HBS finance professor Malcolm Baker and Harvard economics professor Andrei Shleifer to get the proj ect off the ground. “Historically our group has been pretty fluid, though, and we decided it would be worthwhile to formalize the relationships and work on channeling the keen interest many of us have in financial stability.”

There is consensus within the group that financial instability often follows periods when institutions, policy makers, and investors have underestimated risks. These errors in perception are visible in the run-up to past financial crises. “If beliefs and expectations can be measured in real time,” says Greenwood, “it would be easier to anticipate financial vulnerability and take measures to prevent future crises.”

BFFS Project research focuses on five areas: regulation and monetary policy; measuring bubbles; extrapolation and neglected risks; the size and structure of the financial sector; and governance, incen tives, and culture. A database of financial stability and investor sentiment measures is published in real time on an ongoing basis on the BFFS Project website, which makes the data accessible to outside researchers, practitioners, and the public.

Greenwood notes that “on the website you can click on a country and immediately see the probability that a given sector within that country is currently experiencing a bubble . ” For users seeking a longer-term perspective, the BFFS Project site also includes a historical database of banking, stock market, and currency crises in more than 60 countries since 1800.

In addition to regular meetings among the Harvard-based scholars, the project organizes occasional conferences and invites renown- ed researchers, policy makers, and financial market executives to meet with BFFS faculty to promote the productive exchange of ideas.

“We began by mobilizing Harvard research around the realities of how markets, individuals, and institutions behave ,” says Greenwood. “Ultimately though, we want the research to have broad real-world impact. Harvard scholars are leaders in this field. The BFFS Project is helping us disseminate knowledge that could help prevent a lot of economic misery.”